Diana Choyleva, an economist at Lombard Street Research, says that developing economic trends bode ill for the beleaguered UK economy.

Diana Choyleva, an economist at Lombard Street Research, says that developing economic trends bode ill for the beleaguered UK economy.

One issue that will dog the UK economy is the performance of sterling, which is likely to continue to depreciate against the euro. While it is clear that the US is in the doldrums and in a much worse state than the UK, a sharp deterioration in the economy here is likely. Sterling is particularly exposed to a fall against the euro, with growth and interest rates likely to hold up better in the eurozone than in the UK.

The success of the economy is heavily dependent on the performance of the financial sector, so this is bad news for business. We forecast UK output growth at around 1.5 per cent for 2008 and have done since the middle of last year when the market consensus was about 2.4 per cent.

Until now, there has been a liquidity crunch, but the global re-pricing of risk that we have been subject to finally threatens to become the credit crunch that everybody has discussed.

Although the measures taken by the Bank of England, namely cutting interest rates, managed to unwind a large chunk of the tightening in the money markets, banks have suffered and they are facing capital constraints as lending standards rise.
The current climate will have a negative impact on business.